Commodities were up 6.6% for the quarter, while the Energy and Materials sectors were down. Two Federal Reserve presidents resigned amid a securities trading controversy. Major political uncertainties swirl around the debt ceiling and spending bills. Supply chain issues are pushing inflation up. Employers are scrambling to find workers. A hamster who trades cryptocurrency is beating the S&P 500.
It’s safe to say that things are getting weird.
There are financial firms that say they can put factors like wages, inflation, interest rates, unemployment, energy prices, Chinese real estate, and even data around the continuing global pandemic into a spreadsheet to paint a logical, quantifiable picture of the future. For some reason, preparing for this predicted future often means buying their latest Frankenstein-ed financial product.
We don’t know how any of these data points will develop, but long-term investors don’t need to. While we can quantify and predict some things, human nature is not one of them. People make unpredictable and irrational choices all the time. AirBnB hosts in rival college towns hike prices so high for rivalry games that their units intentionally go un-rented for those weekends. It may seem irrational to forego such lucrative rent, but Buckeye fans are more than happy to deter fans of that team up north.
The more an investor tries to connect the dots between market movements and events or data points, the less success and more anxiety they find. That is not to say we ignore all news. It just makes more sense to control what we can control and make decisions based on an individual’s specific situation than to day trade headlines. Besides, history shows that optimism is closer to reality than cynicism. What if there’s good news on the pandemic? What if the global microchip shortage fades? What if the new Dune movie is actually good? Stranger things have happened.
Shifting from what might happen to what has already occurred, the S&P 500 is up 30% over the last 12 months, 16% (annualized) over the last 3 years, and 17% (annualized) over the last 5 years. We should prepare for weaker returns going forward and take time to reassess where portfolios stand relative to their goals. Some investors may find themselves ahead of where they had planned. This opens up the option to reduce risk, increase charitable giving, or may just provide additional peace of mind.
A last word regarding hamsters: We do not advocate rodent-led investing (the SEC does not allow animals to be portfolio managers for mutual funds or ETFs), but it’s a reminder that the world is not a tidy, closed system of linear relationships. In the short-term, randomness often wins, but that doesn’t mean we should replace our index fund with a hamster. Keeping this in mind helps put the daily headlines in perspective and sharpens the focus on longer-term financial objectives.